Pricing Chaos

Perhaps the biggest issue facing the branded pharmaceutical industry today is the price we charge for our drugs.  Our customers are telling us in so many ways that our prices do not often match up with the value delivered by the product.  Take a long look at this piece on how to cut drug costs and see if it doesn’t seem a little weird.  When there is this much chaos, it just looks like we are trying to patch up a broken system.  Perhaps it is time to think about that old children’s story about the emperor who marched in parades with no clothes on.  All his “people” told him how wonderful he looked and it finally took a young child to point out what everyone knew.  The emperor was wearing no clothes and looked awful.  Take a step back, re-read the article and see if we might be in the same situation as the emperor.

How are customers telling us they don’t like our prices?  Well first physicians, payers and patients are now using generics 85% of the time.  When generics are available for a product, hardly anybody ever uses the brand and that starts on the first day a generic is available.  Keep in mind the 15% of time a brand is used includes when there is no alternative generic product in a category.  In addition to the generic situation, brands that do get utilized are usually discounted significantly to allow them to attain “tier 2″ status.  If the payer won’t accept the rebate then the company tries to push against the system by giving co-pay vouchers to the patients.  All of this seems very strange and it just seems like there is way too much manipulation going on to make the delivery of healthcare efficient.

The industry needs to quickly realize that we are being faced with a perfect storm.  Payers have done a masterful job setting up a system where patients and physicians suffer serious financial penalties for using branded products.  Branded products are a choice, but now they are definitely the last choice.  Pharmacists no longer need to push generics, but rather need to spend time calming patients down when a generic is not available.  Protocols, formularies and algorithms are now becoming standards of medical practice and there is little room for physicians to stray.

We need to be very realistic about the situation.  First we need to recognize that so much of this problem is the result of the great drugs the industry has turned out over the last couple decades.  The generics today are generic equivalents of great drugs that are the standard of care not because of cost but rather based on their clinical profile.  Some of the new drugs may have some advantages for some patients, but when they are priced at many times the generics, they will only be used when generics have failed.  Very few people can tell the difference between a $150 bottle of wine and a $30 one, and even if they could they would only buy it on very rare occasions.

Change is needed and I mean big change.  This may get forced on us if the courts decide co-pay cards are illegal or if payers became more aggressive against their use.  We need to really show comparative value for our new products.  I am not talking about comparing one branded product in a category against another brand but rather the new brand against all available competition.

Perhaps this will force us to only focus on areas where there is no completion and abandon the “me too” efforts.  Perhaps it will require modification of Waxman-Hatch that would reward companies longer for their innovative efforts.  Perhaps there needs to be some legal/compliance reforms so that companies aren’t throwing billions of dollars back to the government for settlements.  Perhaps we need to reconsider the sales and marketing model we have worked with for 50 years.  Perhaps we need to take greater control of the distribution chain cutting out the middle people and their costs.  Perhaps it is some combination of all of these, but it is important that we quickly realize just like the emperor in the children’s story that we need to immediately face reality.

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